If adopted, the Proposed Rule would clarify and establish a new process-based safe harbor for plan fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) to select designated investment alternatives (DIAs) in participant-directed individual account plans while complying with their fiduciary responsibility of prudence. The Proposed Rule was foreshadowed by the DOL’s May 2025 Compliance Assistance Release, as previously reported (the “May 2025 Release”) and President Trump’s Executive Order 14330.
Key provisions
No per se imprudence
According to the Proposed Rule, plan fiduciaries have complete discretion to select investment options, provided that such selection does not violate any laws. This echoes the “neutral approach” embraced in the May 2025 Release, which seeks to replace the Biden-era DOL’s guidance that advocated extreme caution prior to adding crypto investments to 401(k) alternatives for plan participants. The Biden-era guidance also informed fiduciaries of an investigative program specifically targeted towards plans offering such investments. The Proposed Rule clarifies that investments in alternative investments, including private market investments, direct and indirect interests in real estate, holdings in actively managed investment vehicles investing in digital assets, direct and indirect investments in commodities, direct and indirect interests in projects financing infrastructure development, and lifetime income strategies, will not automatically be subject to heightened scrutiny by the DOL.
Process-based safe harbor
The Proposed Rule seeks to further insulate plan fiduciaries from liability resulting from DIA investment selections through a process-based safe harbor. Through the safe harbor, plan fiduciaries who objectively, thoroughly and analytically consider any or all of six enumerated factors when selecting DIAs for a plan menu are entitled to significant deference regarding that determination. The six factors are:
(1) Performance
A plan fiduciary must consider a reasonable number of similar alternatives and determine that the risk-adjusted expected returns of the DIA, over an appropriate time horizon, net of anticipated fees and expenses, further the purposes of the plan. Importantly, plan fiduciaries need not select the investment with the highest returns; it is often prudent to select a lower-risk strategy with a lower expected return. Plan fiduciaries also should consider appropriate time horizons for retirement savings, which may emphasize long-term historical performance.
(2) Fees
A plan fiduciary must consider a reasonable number of similar alternatives and determine that the DIA's fees and expenses are appropriate. In doing so, a fiduciary must take into account its risk-adjusted expected returns in addition to any other benefits, features or services the DIA brings to furthering the purposes of the plan. The Proposed Rule makes clear that a fiduciary is not imprudent solely because it does not select the alternative with the lowest fees. However, a plan fiduciary that fails entirely to consider fee differences among share classes of the same fund would not satisfy the safe harbor.
(3) Liquidity
A plan fiduciary must appropriately consider and determine that the DIA will have sufficient liquidity to meet the anticipated needs of the plan at both the plan and individual levels.
(4) Valuation
A plan fiduciary must appropriately consider and determine that the DIA has adopted adequate measures to ensure it is capable of being timely and accurately valued in accordance with the needs of the plan.
(5) Performance benchmark
A plan fiduciary must appropriately consider and determine that each DIA has a "meaningful benchmark" and compare the DIA's risk-adjusted expected returns to that benchmark. A "meaningful benchmark" is defined as an investment, strategy, index, or other comparator with similar mandates, strategies, objectives, and risks to the DIA.
(6) Complexity
A plan fiduciary must appropriately consider the complexity of the DIA and determine whether it has the skills, knowledge, experience, and capacity to comprehend the investment sufficiently to discharge its obligations under ERISA, or whether it must seek assistance from a qualified investment advice fiduciary, investment manager, or other individual. If a fiduciary lacks the requisite expertise, it has a duty to hire independent professional advisors.
The DOL noted that when a plan fiduciary follows the process described in the safe harbor with respect to any or all of the six factors, its judgment regarding those factors "is presumed to have met the duties under section 404(a)(1)(B) of ERISA" and "is entitled to significant deference." The DOL further views this safe harbor as consistent with the deferential approach reflected in existing case law, including the Supreme Court's instruction in Hughes v. Northwestern University1 that courts "give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise."
Compliance points
Under the Proposed Rule, plan fiduciaries who wish to include alternative investments as DIAs must still consider the unique characteristics that previously made their integration into retirement plan investments challenging. In particular, the Proposed Rule states that specialized analysis may be required to understand alternative investments’ liquidity, valuation, and fees.
- Alternative investments are often significantly less liquid than the publicly traded funds that dominate retirement plan menus. Therefore, plan fiduciaries must evaluate whether a particular investment can meet liquidity demands that are created through participant hardship withdrawals, loans, separations from service or certain plan-level events.
- Alternative investments might also not be publicly traded and therefore are not subject to continuous and readily available valuations. As a result, fiduciaries must appropriately determine that an investment asset has adopted adequate measures to ensure timely and accurate valuation.
- Alternative investments tend to utilize more complex, and oftentimes higher, fee structures than traditional investments. While complex fee structures and performance fees are permitted, plan fiduciaries must take special care to ensure they understand each element of the fee structure and determine that the structure aligns with their fiduciary responsibilities.
The Proposed Rule does not mandate or favor the inclusion of alternative investments. However, by providing an asset-neutral safe harbor and a series of illustrative examples that frequently reference target date funds containing private equity, hedge fund, and other alternative asset sleeves, the DOL is signaling that fiduciaries who follow a prudent process should not be deterred from including alternatives on plan menus.
The Proposed Rule applies specifically to a fiduciary's duty of prudence in selecting DIAs for participant-directed individual account plans. It does not address the separate and ongoing duty to monitor investments after their initial selection, although the DOL has indicated it plans to issue separate interpretive guidance on monitoring obligations in the near term. The DOL has stated that the factors and processes in the Proposed Rule would likely apply to monitoring as well.
Next steps
Comments on the Proposed Rule are due 60 days from the date of publication in the Federal Register. Plan fiduciaries seeking to take advantage of the Proposed Rule should closely monitor developments and DOL guidance, evaluate their current investment menus and compliance processes and consider engaging qualified investment professionals.
Footnotes
1 Hughes v. Northwestern University, 595 U.S. 170, 177 (2022).
